Can India take a lead in clean energy?

Print Friendly

In world-leading economies such as China, Germany and the US, huge investments are being made to position them for a low-carbon future. The rationale behind this investment includes the benefits of improved energy security, stronger trade balances, growth in employment and industry leadership, not to ignore the associated environmental gains. In this article, we look at the huge potential for the continued modernisation of the electricity sector in India.

At the present rate of growth, India is poised to overtake Russia and Japan to become the third largest electricity market in the world in 2012. Over the next decade India is very likely to be the second largest market globally, in terms of new power-generating capacity installations. How India meets its massive growth in energy demand will have a dramatic impact on the global issue of climate change, and with the added clout of India and China potentially working in parallel, the joint step-up in demand could drive the next leap in economies of scale that is required to make renewable energy technologies cost competitive with existing fossil fuel alternatives. The implications for the global economy over the next decade should not be underestimated.

When it comes to economic growth, India’s track record is less consistent than China’s. Inflation remains excessive. State government indebtedness is a major obstacle in marshalling the massive infrastructure investment required. Lack of depth in the Indian financial sector also limits funding options. Regulatory transparency, longevity and certainty (TLC) in the power sector is also insufficient. Fossil fuel subsidies are rampant. India also has one of the world’s lowest per capita electricity consumption rates, at 778kWh per annum; less than one tenth of the OECD average. Energy poverty and blackouts are a challenge to growth.

By contrast, India’s GDP growth of 6-8 per cent per annum looks set to continue, meaning that the addition of 10-20GW a year of new power capacity is a prerequisite. Having added some 8GW per annum since 2002, 2011/12 should see 17-20GW of new capacity added. India is installing 2-3GW of wind farms annually, and at 16GW in total, India has the 5th largest portfolio of wind assets in the world. A continued development of hydro and nuclear capacity, plus a major new push into solar installations, should therefore accelerate the deployment of low-carbon/renewable energy.

Furthermore, Power Grid Corp of India alone is spending $US2.5 billion annually on grid transmission upgrades, suggesting critical transmission hurdles are being addressed. A target to reduce carbon emission intensity by 20-25 per cent by 2020 also has real potential. India’s investment in clean energy assets rose 52 per cent year-on-year in 2011 to $US10 billion. For these reasons, we identify India as emerging in 2012 as a potential clean energy leader globally.

India’s Government Policy Background

India’s 11th Five Year Plan (2007-2012) set a target GDP growth rate of 9 per cent per annum. Although the global financial crisis and internal inflation pressures have undermined this target, India has averaged 8.2 per cent in the first four years. The draft 12th Five Year Plan (2012-2017) sets an 8-9 per cent per annum GDP growth target. The workforce is forecast to grow 32 per cent over the next two decades (by comparison, the OECD and China average will decline by 4 and 5 per cent respectively in the same period). As such, the 12th Five Year Plan focus on strong but sustainable growth is critical.

In 2006 the Indian government created the Ministry for New and Renewable Energy (MNRE). This has centralised the responsibility and resources for creating a renewable energy plan for India. Several recent key policy tools at the Ministry’s disposal include:

– The National Action Plan on Climate Change targets 15 per cent renewable energy for India by 2020. We would note that India excludes its 39GW of large-scale hydro when calculating its renewable energy target. Adding hydro generation of 21 per cent to India’s total gives an implied renewable energy target by 2020 of 35 per cent.

– The introduction of Renewable Purchase Obligations (RPO) requires each state to generate a portion of their energy from renewables.

– In March 2011 the Government of India created a tradable market in solar power generation credits, the Renewable Energy Credits (RECs).

– The Jawaharlal Nehru National Solar Mission was launched in November 2009 with the mandate to install 22GW of solar PV and solar thermal in India by 2022.

– The creation of Indian Renewable Energy Development Agency (IREDA) to help overcome financial market obstacles to financing renewable infrastructure.

– The Asian Development Bank (ADB) has provided $150 million of funding for a Partial Credit Guarantee (PCG) to provide private financial institutions some cover against legal, political, commercial risks evident in the initial solar infrastructure projects. This leverages the ADB’s AAA credit rating and project endorsement.

– Coal tax of 50 Rupee per tonne ($US1/t), introduced from July 2010, this is forecast to raise over $US500 million per annum to with the proceeds going to the National Clean Energy Fund.

– The National Mission on Enhanced Energy Efficiency was launched in 2008 – and the 12th Five Year Plan recognises its objectives fully: “increased energy efficiency is the only way to contain energy demand without jeopardising growth”.

– The Integrated Energy Pricing Policy (IEPP) approved in Cabinet in 2009 set the target to align fuel prices with global averages. Currently diesel carries a government subsidy of 20 per cent, LPG carries a subsidy of 50 per cent and kerosene 70 per cent. While gas is not subsidised directly, most of India’s gas production is used for the manufacture of fertilizer, and a price control here means the Government ends up funding any gas price rise through the fertilizer subsidy. Domestic coal prices are also 30-50 per cent below imported price equivalents (even adjusting for much lower calorific value). Electricity prices are also state controlled and agricultural needs are especially heavily subsidised. Government-owned electricity distribution entities had combined operating losses of some $US14 billion in 2011. As such, the IEEP policy has not yet been enforced.

Clean Energy Investments – Progress in 2011

In 2011 India achieved a record $US10.3 billion in clean energy investments, up 52 per cent year-on-year, to have the fastest growth of any major country globally. Bloomberg New Energy Finance reported that India saw a seven-fold increase in funding for grid-connected solar projects worth $US4.2 billion. This put investment in the solar sector almost equal to the record $US4.6 billion invested in 2011 in the Indian wind sector (with 2.8GW of installs). On current indications, Arkx would expect India to deliver another 30 per cent growth in total investment in 2012, sufficient to challenge Italy for fourth place globally in terms of new investment in the clean energy sector.

India’s need for new electricity capacity

The likely growth in India’s electricity sector over the next two decades is second only to China in magnitude. A study by McKinsey “Powering India – the Road to 2017” suggests that the current electricity demand of around 120GW per annum today is likely to grow to in-excess of 300GW by 2017. This would require installed generation capacity of well over 400 GW relative to 2011 levels of 185GW, a 116 per cent increase. When McKinsey wrote their report in 2008, generating capacity was 140MW; since then 10-12GW per annum has already been added. India’s 185GW of generation capacity is split 65 per cent thermal (122GW), 21 per cent hydro (39GW), 3 per cent nuclear (5GW) and 11 per cent renewable energy, (mostly wind – 20GW).

India’s Central Electricity Authority forecast the addition of 17GW over 2011/2012, including 14.1GW of thermal capacity, 2.1GW of large-scale hydro and 1.0 GW of nuclear. Include in this mix 2-3GW of new wind installs and this puts total additions at 20GW. The Central Electricity Authority report suggests overall demand is 10 per cent above supply in 2011, with peak demand 13 per cent above supply. The result is rolling blackouts even for those grid-connected. Over 300 million people in India still live with no electricity. As the Club of Rome has long highlighted, access to electricity is a key enabler to allow self-help to alleviate poverty.

The 12th Five Year Plan forecasts energy demand to grow 6 per cent per annum and electricity capacity to expand by 100GW (20GW per annum). Critical to the new plan is the focus on measures to combat the continued rise in India’s dependence on imported energy. Oil imports are forecast to rise from 76 per cent of total consumption in 2011 to 80 per cent by 2017; coal imports will rise from 20 per cent in 2011 to 22 per cent by 2017 (in period when total Indian coal consumption will double) and gas from 19 to 28 per cent. Energy security is a central issue for India. Higher global energy prices would have a significant impact on India’s growth prospects.

Solar Capacity –  1GW of installs in 2012; 23GW per annum by 2022?

The Capital Markets Climate Initiative working paper of August 2011 provides an excellent summary of the opportunities and challenges involved in scaling up to 22GW of solar in India by 2022. From a zero-installed base of solar capacity at the start of 2011, we are expecting India to install close to 1GW of solar thermal and solar PV combined in 2012. For the government’s 22GW target to be achieved by 2022, some 2GW of solar installs will be required annually.

Solar radiation is north of 2,000kWh/m2 pa across the Southern, Western and Central States of India (50 per cent of the country’s landmass). This is similar to Australia, and double that of Germany (the country with 25GW of solar already operational). Helpfully, India’s population centres are aligned with the highest radiation areas (significantly reducing transmission infrastructure needs), whereas in Australia we (sensibly) live in the lowest solar areas!

A KPMG India paper “The Rising Sun of May 2011″ provides an excellent insight into the potential for solar in India over the next decade. KPMG bravely suggests that wholesale grid parity for solar in India could be achieved by 2016-2018. We would argue that even this is too conservative, given solar module costs have dropped 50 per cent in the nine months since KPMG published this forecast (KPMG ‘only’ modeled solar cost deflation at 5-7 per cent per annum; Arkx model 10-15 per cent pa deflation). KPMG suggests that by 2022, India could have 68GW of solar capacity installed. An even more amazing suggestion – that solar installs of 23GW per annum by 2022 – is feasible. KPMG, in particular, outlines in its report the huge potential for diesel replacement in agricultural water pumps, solar-powered telecom towers and residential rooftop solar PV, both on and off grid.

A key component underpinning the National Solar Mission’s momentum is the creation of NTPC Vidyut Vyapar Nigam Limited (NVVM), which offers solar project developers 25 year power purchase agreements (or ‘PPAs’). Government of India owned, the aim is to make NVVM a high credit rating and hence bankable counterparty.

The Gujarat province’s Phase 1 tender in 2011 saw 958MW of smaller scale solar projects awarded. A rate of 15 rupee per kWh was awarded to 32 projects, but if the projects were not installed on time, this feed-in tariff (FiT) was cut by 33 per cent. Both solar thermal and solar PV projects were awarded. The solar PV FiT will hold for 12 years, but then drops materially for the following 13 years; i.e. a 25 year PPA in total. Domestic product sourcing is a requirement, and is aimed at building up a domestic Indian cleantech manufacturing industry.

An interesting approach has also been the creation of the Gujarat Power Corporation Limited, an agency responsible for developing a 500MW solar park. Gujarat Power has taken on the land acquisition, permitting and transmission infrastructure roles centrally, allowing utility-scale solar project developers greater certainty and reduced obstacle. The Asian Development Bank has provided a $US100 million loan support facility to fund this central infrastructure.

In February 2012, the Rajasthan state government announced it would hold its first solar auction to award 200MW of contracts by June 2012, half solar PV and half solar thermal. The vast desert of Rajasthan offers more than 325 sunny days a year and world leading solar radiation levels. The state government is consequently targeting 1.5GW of solar by 2014 and 4.5GW by 2018.

Further confirmation of the momentum that is building in the Indian solar market was evident in the February 2012 Power-One Inc result briefing. Power-One, the No.2 solar inverter manufacturer in the world, reported that India was one of its largest growth markets, second only to the US. Power-One reported that its 2011 shipments of solar inverters to India totaled 200MW. CEO Richard Thompson estimated Power-One’s market share at over 20 per cent, suggesting 1GW of solar inverters were shipped in India late in 2011. This indicates a very rapid ramp-up in solar installations, and one that will quickly close in on the National Solar Mission target of 2GW pa over the course of this decade.

MEMC’s SunEdison also reported in February 2012 it had completed some 200MW of solar projects in Phase I of India’s National Solar Mission. Sun Edison is currently the third-largest solar project developer in the world, with a global orderbook of 2.7GW. In November 2011, First Solar won a 40MW project tender in Gujarat in the same Phase I tender.

Wind Farms – 3-5 GW per annum

The total capacity of Indian wind farms operating by the end of 2011 was 16GW, the fifth largest fleet in the world behind China, the US, Germany and Spain. To put this into a local context, this is 700 per cent greater than the 2,224MW of wind farms currently operational in Australia.

The Global Wind Energy Council reports total Indian onshore wind farm additions in 2011 were 2.8GW, well up on India’s last three years average of 2GW per annum. Suzlon Energy Limited, with market share of some 50 per cent of the Indian wind market, has forecast that “the Indian market is projected to reach 5GW annually by 2015”. The Global Wind Energy Council forecast that the Indian wind sector could reach 65GW by 2020, implying annual installs of 5GW per annum for the next decade. The need is clearly there, as is the local turbine production capacity, but the financial structures and grid infrastructure are not (yet).


The 12th Five Year Plan also puts considerable emphasis on the development of high voltage transmission lines of 765KV and even 1,000/1,200KV capacity. This is particularly relevant should the huge hydro capacity of the north-east states bordering the Himalayas be enhanced, given the excess energy would need to be efficiently moved to central India without excessive transmission losses.

Power Grid Corp. of India alone is spending $US2.5 billion annually on grid transmission upgrades, suggesting critical transmission hurdles are being addressed. Power Grid Corp. operates 86,000km of transmission lines across India and is the largest listed transmission company in the world.

A massive grid transmission and distribution system upgrade is urgently needed. Grid system losses are estimated at 30 per cent, which is double the OECD average. Wastage, transmission losses and non-technical losses (theft) add a major financial burden on the Indian electricity system, raising costs to consumers. Reduced system losses would improve profitability and reduce the need for additional generating capacity.

ABB Group, in December 2011, announced it had won a $US900 million substation switchgear and transformers order in India from Power Grid Corp. This was one of the largest substation contracts awarded in 2011 anywhere in the world.

Coal tax

From July 2010 India introduced a nationwide carbon tax of 50 rupees per metric tonne ($US1/t) of coal both produced and imported into India. The carbon tax expects to raise 25 billion rupees ($US535 million) per annum, and will help to finance a National Clean Energy Fund (NCEF).

Financial market limitations

One of the key constraints on India’s electricity sector upgrade is the limited availability of capital. Many state-owned power distribution utilities are heavily loss-making. The limited depth in the Indian domestic financial sector and high interest rates makes accessing debt capital difficult, particularly as long-term infrastructure projects in many other countries are backed by power purchase agreements written by AA rated utilities with strong cashflows and huge balance sheets. In addition, private sector involvement in the Indian electricity sector is relatively limited. Power Grid Corp is 72 per cent government owned. Coal India is 90 per cent government owned. The majority of electricity generation assets are also government owned. Having said this, the government has realised public-private partnerships are critical to raising the required capital, and has taken steps to foster private interest.

This has seen leading industrial conglomerates of India such as Reliance Power and Bharat Heavy Electricals Ltd renew their focus on the power sector. Several newer, smaller listed firms have increased their focus on renewable infrastructure assets, including Greenko Group, Orient Green Power, Mytrah Energy Limited, Moser Baer India and Lanco Infratech, each of whom have significant wind and/or solar project pipelines in place. For example, Mytrah has signed an Indian wind turbine supply contracts with Suzlon totaling 3GW.

As mentioned above, the Asian Development Bank has been active in providing partial loan guarantees and extending $100 million of loans to the Gujarat Power Corporation. The government of India is hopeful that its National Solar Mission can also tap into the World Bank’s Clean Technology Fund. A multi-lateral aid proposal, including leading developed countries such as Australia have pledged financial support since 2008. While action is currently not evident, it is crucially needed.

It is without doubt that bilateral agreements could play a more material role in accelerating India’s renewable sector and building on the current base. For example, the Gujarat state government has made Gujarat a regional focus for manufacturing solar equipment, generation and R&D. The Gujarat Venture Finance Ltd (GVFL) was launched with the target of a $US500 million green energy fund dedicated to attracting Chinese firms to invest in Gujarat to encourage the deployment of Chinese technology. Funding is split between the governments of India and China. This concept is a World Bank initiative to assist the deployment of venture capital focused on Small to Medium Enterprises.

In addition, the US Export-Import Bank extended $US103 million of loans in November 2011 to aid MiaSola, First Solar and SolarWorld in financing Phase 1 solar projects in India. In January 2012 the US Export-Import Bank also said it was considering over $US2 billion of loans into India, tied to US export contracts. Many of these are renewable energy based.

In 2011, the European Investment Bank (EIB) also granted a €200 million loan to ICIBI Bank of India for renewable energy lending. KfW (the German Government’s development bank) was also active, funding a €250 million loan to Maharashtra State Power Generation for a 150MW solar project in New Delhi, due for completion by December 2012.

In October 2011, Greenko Group signed a deal with GE Financial Services (GEFS) whereby GEFS will invest $US50 million in a new 65MW wind farm in India. As part of the transaction, Greenko will use GE’s 1.6MW turbines, manufactured in GE’s facility in Pune, India.

India has the need and the potential to become a world leader in renewable energy in 2012. The progress in wind, solar and hydro energy power, plus the increased focus on grid transmission efficiency looks very promising.

Tim Buckley is a Portfolio Manager at Arkx Investment Management

Arkx Investment Management focuses its investment approach on a portfolio of high conviction stocks in the listed global clean energy universe. It looks for proven performers with world leading technologies backed by strong balance sheets and priced on sensible valuation metrics. We have investments in some of the companies mentioned (ABB Ltd and First Solar).

For more detail on the renewable energy initiatives of China, Germany and the US, please refer to our prior articles on (refer here, here and here).

RenewEconomy Free Daily Newsletter

Share this:

  • http://www, D.K. Ghosh

    I was expecting some comments on the Biomass Electricity market in India.

  • Mike Straub

    Let’s get India on board with Ocean Thermal Energy Conversion (OTEC). Endless emission free power created from the temperature difference in shallow and deep water. It could be a huge power benefit to the communities along the Indian coast, but the OTEC benefits could run throughout the entire country. The only byproduct of an OTEC system is clean drinking water. Those millions of gallons could reach communities all over the nation, and as India continues to grow into the most populated country in the world, clean water sources will be worth their weight in rupees.

    More OTEC info at The On Project:

  • Er. Jayant Ingolikar

    The challenge of tracking huge elecrical energy needs with present theme and techniques of power is going to be a really an uphill task for India. If we are to achieve goals of power targets as per growing needs, we need to revamp concept of energy. It will never be possible to track electrical energy needs with present theme and techniques in vogue. While revamping concept of electrical energy we need to introduce new technique and theme of power. I have one such concept which has tremendous potential. The concept can be transformed in reality with little R&D efforts in short period of time. Any body interested in knowing further details for development of concept may contact me.

  • VK Sharma

    India certainly can do it with the once in a lifetime opportunity that has come its way in the form of requirement of raising per year per capita consumption of energy from 778kWh to about 5000 kwh in 2 decades i.e. it has to add 0.5 to 0.7 million kwh during this period. The polity’s statesmanship with right decisions and right policies on route to energy security can catapult India to global leadership. more details on link below.